Crowdfunding Update: Highlights from the JOBS Act

President Obama recently signed into law the Jumpstart Our Business Startup (“JOBS”) Act. The JOBS Act has many provisions that clients and investors have asked me about recently. This post summarizes some of the features:

Increase in number of shareholders for companies not subject to SEC reporting requirements. The former rules and regulations required that companies with 500 or more shareholders comply with certain reporting requirements that generally only apply to “public” companies (i.e., those who have filed for an IPO). This rule required Facebook to start complying with reporting requirements prior to the time it actually filed for an IPO. The new rules allow companies to have up to 1,000 shareholders before they become “de facto” public companies (such as Facebook). Most of the SBN readers will have far fewer than even 500 shareholders for quite some time, so this rule might not immediately affect you.

“Crowdfunding” OK’d. The new rules allow companies to raise up to $1 million from certain types of crowdfunding platforms. If the company provides audited financial statements, then they can raise up to $2 million. Some of the characteristics for crowdfunding are as follows:

Investors can only invest up to $10,000 or 10% of their income, if less.

Sales can occur through website solicitations, personal solicitation, personal solicitations or other direct approaches BUT

The sales must occur through SEC approved portals (this change was a Senate addition to the bill).

Relaxation of other Securities Regulations.

The JOBS Act also allows certain types of “emerging growth companies” to phase in SEC compliance with certain regulatory, fees, reporting and accounting requirements if they have less than $1 billion in revenue.

Companies selling stock or interests under Rule 506 (many of the companies in SBN’s readership rely on this exemption) can use certain types of advertisements to solicit investors. This was strictly forbidden before.

The JOBS Act will certainly bring about some important changes for companies seeking financing, and it will likely make it easier for companies to get funding. Unfortunately, the SEC still has to issue new rules interpreting the JOBS Act and how it will be enforced.

So, there are many question marks about how the JOBS Act will work. For example, because companies may raise funds from so many small investors, questions have arisen about whether larger institutional venture and angel investors will be hesitant to invest in companies with a large number of small shareholders. Also, corporate laws require certain types of notice and voting by shareholders, so a small company with limited operating funds is going to face some challenges in communicating to such a wide and diverse number of small shareholders. It will be interesting to see how some of these questions get answered.

Check back regularly for updates as the new rules are proposed, and remember to use caution before your company is off to the races to seek crowdfunding.